Business Combination and Partnership Lecture 2 B

Nature and Importance of Cooperative Strategies

The philosophy behind cooperative strategy is that a company cannot always stand
or go alone.

Rather it can strengthen its competitiveness through forming partnerships with other
companies.

In the recent years, the need for cooperative strategies has been heightened
because of the following:

 Intensified competition in the domestic market

 Opening up of a vast market in different parts of the world (especially in the

Eastern Europe and South-East Asia);
 Advances in telecommunication and information technology;
 Development of transportation across the world by roads, air and sea;
 Globalization of business; and
 Trade liberalization in many countries since the emergence of the World Trade
Organization (WTO).

Name of Companies Number of collaborative partnerships

- General Electric 100+
- IIBM 400
I - Oracle 15000+

 Toyota Motor Company of Japan has built up a large network of partnerships

with all of its suppliers of parts and components. The software giant of the
world, Microsoft Corporation, has strategic partnerships with numerous
software developers.
 Cooperative alliances are prevalent in those industries where there are rapid
changes in technology, business environment and customer needs. An
example of such an industry is computer industry. The computer components
and software are produced by a large number of companies.

Strategic Alliance

 Also known as strategic partnership, strategic alliance is a collaborative

arrangement between two or more organizations.
 It is a non-equity cooperation agreement between two or more firms for
promoting their joint competitive advantage.
 Strategic alliance is formed to help each other in organizational/business
functions for mutual benefits.
 It does not entail forming a new organizational entity. The partners in strategic
alliances have no formal ownership ties like joint venture.
 The collaborative arrangement must result in win win outcomes for all partners
 to ensure ultimate success.

Examples of strategic alliances include HP and Intel, Microsoft, AT&T and UPS;
Merck and J&J; IBM and Dell; Pfizer and Warner-Lambert, Grameen Phone and five
mobile phone operators; and Dutch-Bangia Bank and few other commercial banks.

Japan's Toyota has developed a network of over 34,000 alliances with its suppliers of
parts and components.

Major Reasons for Strategic Alliances

1. To avoid more costly process of building own capabilities.

2. To substantially improve competitiveness.
3. To collaborate on technology or development of a new product.
4. To overcome deficits in their technical and manufacturing expertise.
5. To acquire altogether new competencies.
6. To improve supply chain efficiency.
7. To gain economies of scale in production and distribution.
8. To improve market access through joint marketing agreements.
9. To open up expanded opportunities in an industry through collaboration

Causes for Failure of Strategic Alliances

 Inability of the partners to work together.

 Failure or delay in responding and adapting to changes in business
environment.
 Lack of willingness by the partners to renegotiate the terms and conditions.
 Failure of the partners for mutual respect of values and cultures

 Partners' failure or unwillingness to negotiate further if circumstances so

require.
 Rivalry between partners in the marketplace.

 Inability of the partners to ensure win-win outcomes from the agreements.

Joint Venture

 A joint venture refers to a new organization established by two or more

organizations.
 It is an agreement where two or more firms hold equity capital in a venture. In
this venture, all the partner-firms have some degree of control.
 The equity arrangement between independent enterprises results in the
creation of a new organizational entity.
 The partner-companies own the newly created firm.
 To form a joint venture, at least two firms must agree to jointly establish a new
firm.
 Joint venture is preferred when two or more firms lack necessary component
for success in a new business. In the case of construction of Bangabandhu
Setu (Jamuna Bridge), for instance, no single construction firm had necessary
 resources to construct the bridge single-handedly.
 There are many joint ventures in Dhaka Export Processing Zone (EPZ) and
Chittagong EPZ, both national and international.

The advantages of joint ventures are that:

1. It allows the partners to share risks and costs of building a new business.

1. It creates an opportunity to combine skills and assets of partners.

2. It enables the partners to pursue opportunities that are somewhat peripheral

to the strategic interests of the partners.
3. It can be a useful way to gain access to a new business which is very
complex and uneconomical for a single company to pursue alone.
4. It is a formidable way to enter into a foreign market when market entry is
restricted by government. (ex: tariff barriers, import quotas etc)

2. International joint venture is a fruitful means for strengthening a company's

competitiveness in world market.
3. Both local and international joint venture are helpful in facilitating joint
research efforts, technology sharing, joint use of production facilities,
marketing one another's products, and in joining forces to produce
components or assemble finished products.

Difficulties with Joint Venture

 Complicacies arise in dividing the share of control between the partners.

 The partner-companies run the risk of giving technical knowhow away to their
counterparts.
 Conflict over how to run the joint venture can tear it apart and result in business
failure.
 In the case of international joint venture, conflicts may arise over the use of
local resources, local technology, local employees, compliance with local
standards and policies, export volume, operating procedures, use of intellectual
property and technology, use of foreign partner's technology by local partner,
etc.
 Disputes may stem when foreign partners start neglecting the local partner after
the foreign partner has overcome the difficulties.
 Local partners may start own business by seceding their relationship with joint
venture when they could master the technology and develop competitive skills.
Capitalizing on their acquired know-how, they may launch their own products in
separate brand names.

 The joint venture firm may begin to compete more with one of the partners than
the other when all partners are in similar business.
 Problems may arise when the sponsoring firms do not provide support to the
joint venture equally.
 Although the partnering companies may not have problems, they may face
problems due to complaints from the customers about poorer service or about
other issues.
Merger

 Merger takes place when two or more organizations merge together and their
operations are absorbed by a new organization.
 A merger is a strategy through which two or more organizations agree to
integrate their operations on a relatively co-equal basis because they have
resources and capabilities that together may create a stronger competitive
advantage. When combined together, a new company is created.
 After having been merged, the companies loose their independent identities.
Their assets and liabilities are combined. New shares/stocks are issued for the
new company created after merger.
 Merger can take place among organizations within the same country or among
organizations across the national borders. A recent example of international
merger is the deal between Reckitt & Coleman of the U.K. and Benckiser of
the Netherlands. A recent example of a national merger is the merger of
Bangladesh Shilpa Bank (BSB) and Bangladesh Shilpa Rin Sangstha (BSRS)

Acquisition

 An acquisition occurs when one company purchases (or acquires) another

company.
 It is a strategy through which one firm buys a controlling or 100 percent
interest in another firm by making the acquired firm a subsidiary business
within its portfolio.
 The first company (acquirer), after purchasing the company, absorbs the
operations of the second company (the acquired). The acquired company is
merged with the first company. The acquired company's legal identity is lost.
 The acquirer company remains independent and operates its business as it is.
 When the Standard Chartered Bank absorbed the operations of the Grindlays
Bank in the South Asia and South-East Asian region, it was Standard
Charter's acquisition strategy.

The major reasons for acquisition are to: (i) increase market power, (ii) overcome
entry barriers, (iii) reduce cost of new product development, (iv) increase speedy
access to market, (v) reduce risk compared to developing new products, (vi) increase
diversification of businesses, (vii) providing improved capacity utilization, (viii) making
better use of the existing sales force, (ix) gaining economies of scale, and (x) avoid
excessive competition.

Integration Strategy

Integration strategy consists of three types of strategies: Backward integration,

forward integration, and horizontal integration. Backward integration and forward
integration are often referred to as vertical integration.

Meaning and Nature of Vertical Integration

 Vertical integration strategy combines backward integration and forward

integration. It means that vertical integration strategy involves extending
present business of a firm in two possible directions:
o Backward Integration moves an organization into supplying some or all
of the products used in producing its present products;
 o Forward Integration moves the organization into distributing its own
products. Vertical integration is popularly known as vertical linkage in
our country.

There may be backward linkage (backward integration) and/or forward linkage

(forward integration). Vertical integration occurs within the same industry. For a
company, vertical integration involves engaging into producing raw materials or
components that it purchased from other firms, and selling products to the end-users
directly.

 When the company engages into producing the raw materials or components
backward integration (or linkage) takes place.
 When it engages in direct selling of products to end-users, forward integration
(or linkage) takes place. For example, if Berger Paints Company starts
producing raw materials for paints and also establishes 200 retail stores
allover the country to sell its paints to the consumers, we can say that Berger
Paints is a vertically integrated company.

Strategic Disadvantages of Vertical Integration

1. It increases business risk because of diversification and more investments

2. It may prevent the firm from investing in otherwise profitable ventures.
3. Slowing down investing in research and development.
4. Cheaper cost raw materials from outside vendors is not possible to procure.
5. Less flexibility due to reliance on in-house activities and own sources of
supply,
6. When a firm goes for forward or backward integration or both, they require
different skills and capabilities to manage the integrated business activities.

Horizontal Integration

 Horizontal integration refers to having ownership in competitors' firms. When a

company adopts this strategy, it purchases a firm that produces similar
products in the industry. Many companies use horizontal integration strategy
as a growth strategy. This strategy is usually implemented through merger and
acquisition.
 Combinations of two pharmaceutical companies, two sweater manufacturing
firms, two shoe companies or two laundry soap producers can be termed as
horizontal integrations.